About the Gilmo Report

Our objective is to provide actionable stock market ideas, both long and short, to investors who may not ordinarily have access to such an advisory service. Investors who don’t have the net worth or account size to qualify for the various vehicles and programs that purport to use O’Neil methodologies are often left to their own devices. Rote, mechanical advice from less-than-experienced individuals may not provide a complete answer for those who need guidance while “under fire” in the markets in real-time. This Web site gives investors access to the continuous, real-time thinking of an experienced trader who has studied and employed all aspects of the O’Neil methodology, both long and short. In doing so, we believe we can help individual investors gain a deeper understanding of how a professional money manager approaches the use of O’Neil methodologies and thereby improve their own use of these methods.

The methods I employ represent a synthesis of the works and methods of Nicholas Darvas, Richard Wyckoff, Jesse Livermore and William O’Neil. O’Neil’s model book studies filled in the key final pieces of the puzzle by incorporating the original work of identifying and cataloging the fundamental and entrepreneurial characteristics of big, winning stocks. These are the methods I was trained in, and they are the methods that I use today. As a former employee of and portfolio manager for William O’Neil + Company, Inc., I have had wealthy individuals offer to pay me several thousand dollars for a single day of being able to sit down with me, one-on-one, and watch how I implement the O’Neil methods in real-time. Like Jesse Livermore, I prefer to trade alone, so this idea has had little appeal to me. However, through this Web site I can provide individual investors with similar access and in the process help out those who need it most, for a lot less than several thousand dollars a day and in a manner that is not an imposition to my trading day.

Subscribers to this service will receive, twice-weekly, The Gilmo Report. In it I discuss my thoughts about and approach to the current market environment, including the thematic basis for actionable stock ideas. My stock market strategy is based upon what I call “The Big Stock Principle.” This is the essential thematic approach that I use, and subscribers will gain an understanding of how I utilize this principle in my stock selection process. Special updates to The Gilmo Report will appear when and as rapidly changing market conditions dictate. Finally, what sets the The Gilmo Report apart from the crowd of investment Web sites is that it is not a one-way, “bull market only” service, as we will provide actionable short-sale ideas during bear markets. We believe that the trend should always be your friend, whether bull or bear.

Ultimately, successful investing is not about being on the bull side or the bear side, but rather the right side.

Best Wishes for Successful Investing,

Gil Morales

Principal/Chief Executive Officer

Gil Morales & Company, LLC

General

The Gilmo Report is published in the Members Area of this Web site on Sundays and Wednesdays at 6:00 p.m. Pacific Time. Interim issues of The Gilmo Report are published on days other than Sundays and Wednesdays when market conditions dictate. For this reason, subscribers are encouraged to visit the site daily during the week so as to be apprised of an interim report.

Subscribers to The Gilmo Report will receive both individual stock recommendations and real-time general market commentary. In addition, it is our goal to educate investors and in the process build a strong community of like-minded investors.

Investor education will include:

Current and historical stock profiles

Current and historical market “breakdowns”

The critical rules for investment success

The dismantling of common market myths

Recommendations

The Gilmo Report provides both long and short stock recommendations. These should not be confused with general and often vague “Buy, Sell, or Hold” recommendations. Recommendations will be updated as often as twice a week or more, as market conditions dictate.

Specific stock recommendations always include a chart mapping out the recommended strategy. In addition, we will provide comparisons to historically successful price patterns when applicable.

Each recommendation will generally include a “target price” or “zone” for a specific action, whether that be buying, selling, short-selling, or short-covering. The closer to this target price/zone that you are able to execute the recommended action, the better your odds for success should be. When initiating buys or short-sales, the further away from that price, the lower the odds for success. Therefore, we recommend that you be less aggressive in your initial position size and more aggressive in cutting your loss if the position moves against you.

Breakout “Target Areas.” When we qualify a “target area” as a potential “breakout” or “pivot point,” we will generally want to see a strong increase in trading volume as the stock moves through this price area or price point.

Pullback “Target Areas.” When a stock pulls back into a “pullback” target area, we may want to see a stock drift down on light volume, or, if it is pulling down into an area that we believe should represent an area of major support, we will often want to see the stock trade heavier volume as it gains support.

The Market

One of the great myths of the stock market is that you have to be in the market all the time in order to be successful. In our view, this is simply not true. There are times when it is appropriate to be heavily invested and, for aggressive traders, make use of margin. However, as the old saying goes, sometimes “good defense is the best offense,” and there will be times when the market direction is not as obvious. During such an environment, being out of the market and in cash may be the wisest play.

For this reason, underlying general market conditions will always be a key factor in any of our recommendations.

Position Sizing

Number of Positions. Another “Great Myth of the Market” is the idea that diversification offers safety to the individual investor. We come from the point of view that diversification, especially for an individual investor, is not a safe haven. We believe it is more prudent to have fewer eggs in your basket, and to watch those eggs very carefully. The reasons for this are twofold. First, diversification does not save you when severe market corrections occur. When the market rolls over and heads lower, it is going to take most stocks and most sectors with it. The only defense against this is to sell the stocks you are in and move to cash, or try to look for opportunities to sell short. Secondly, it is tremendously difficult to follow 25-30 positions. You end up trying to track too many stocks without truly knowing them well enough to develop that conviction that is necessary to achieve success and capitalize on a potential, big winner. Also, as not all your positions will necessarily be big winners, having too many positions will simply dilute the performance you get from the big winners that you do own in your portfolio. If you have a 5% position in a stock that doubles, the stock’s move will only add 5% to your overall portfolio performance.

We encourage our subscribers to remain focused on a smaller number of stocks in their portfolio. This means having as few as 2 or 3 positions in a small account ($50,000 or less) and perhaps 5 or 6 positions in larger accounts (up to $1 million or more). If this scares you beyond the “sleeping point,” then you could consider a maximum of 10-12 positions, although we do not consider this to be optimal.

Initial Position Size. If you are going to focus on 5-6 positions, this means that each position will represent around 18%-20% of your portfolio when you are fully invested. Your initial buy should be roughly a bit more than half the total position that you eventually intend to build. This means approximately 10%-12% of your total portfolio. You will look to follow up and fill out your full position as the stock continues to show you strength and offers secondary buy points. This also allows the market to dictate how quickly you become fully invested. If your position succeeds, then you can continue adding to it, as well as add more positions in other stocks. If you keep getting stopped out of your initial positions, then the market is telling you that something is not right.

Scalp Trades. Occasionally, The Gilmo Report will recommend stocks that are meant to be what we might call a “scalp” trade. This is meant to be a quicker, smaller trade intended to take advantage of a situation in the general market or a particular technical characteristic we see in an individual stock. This would not be a stock that you are trying to establish a “position” in or hold for an extended period of time. In general, most of these types of trades will be on the short side, but may include long trades as well.

The Sell Decision: Cutting a Loss

There are three important aspects to success in the market – buying right, holding correctly, and, most importantly, selling properly. The most essential aspect to selling properly is to have a plan. We mentioned that you must have a “target area” for when to buy. Holding periods for both long and short positions will also be determined by your plan. It is our mission, here at The Gilmo Report, to help you not only buy or short-sell stocks properly, but also assist you in having a plan to sell or cover these stocks. Your plan should include a course of action for each case: failure or success. In other words, what you do if the trade fails and the stock goes against you, resulting in a losing position, as well as what to do if the trade is successful and the trade begins to show a profit.

Whether you use an actual stop loss order or you have a “mental stop” in place where you will sell, we highly recommend that you have A SET PLAN TO CUT YOUR LOSSES and then stick strictly to that plan!

Cutting a Loss from a “Breakout Buy Point.”
You should look to cut your loss from a “breakout buy point” at no more than 8% from your purchase price. We actually recommend an even tighter stop, 5%, from your purchase price. This is not a trailing stop as the stock moves up. Once your stock moves up and you have a gain, the rules change. For short sales, we recommend a stop-loss policy of 3-5%.

Cutting a Loss from an “Early Entry.”
Early Entry positions mean that you are buying where the “odds” are not quite as optimal as they are for a “breakout entry”. Therefore you are “cheating” a little bit. Early entries can occur on either the long or the short side, and since the odds for success are not as strong, we might use a stop of as little as 2%-3%.

Cutting a Loss for a “Pullback Buy” or “Support Level Buy.”
When we use target “zones” for specific recommendations on the long or short side, we are using certain logical areas of support or resistance, such as 50-day or 200-day moving averages or specific “price congestion” levels. We will generally set our stops just below such support areas for long trades, and just above such resistance areas for short trades. This will usually be explained in the accompanying marked-up chart.

Short Selling

At best, selling a stock short is an exceedingly difficult proposition, and many times more difficult than taking the long side of a trade. For many investors, this may seem implausible.
After all, can’t one simply take the technical chart patterns used in buying stock and turn them upside down and use them to short a stock? No. The reason lies in an analysis of the twin emotions that govern every trade: fear and greed. Greed can be a strong emotion — but not nearly as extreme of an emotion as fear. For example, we may wish to buy a stock because we think it is about to go up and we do not wish to miss the move. This is greed kicking in. But if for some reason we do miss it, it is not going to impact our trading account in a negative way. There is no pain.

By contrast, when we are in a position that begins to move against us, fear kicks in because our account may be impacted in a negative way. At some point, we may be so anxious to exit the trade that we will do nearly anything to get out. Dump the stock, we say to ourselves…this get out at any cost type of fear — the fear of pain — is an emotion that is far more extreme than greed. This tendency for traders to want to get out of a stock much more than they want to get into a stock explains why stocks usually go down faster than they go up. This also means that one’s timing must be much more precise when entering and exiting a short trade than when entering and exiting a long trade. Then there is the issue of short-covering rallies, which are generally more violent and volatile than pullbacks in uptrends.

These are the reasons why short-selling is more difficult than going long — and by factors. Words to the wise: Think twice about taking a short position until you have proven to yourself that you are consistently profitable during intermediate-term bull moves. Even having said this, it is important to realize that some of the very best intermediate-term operators will have nothing to do with the short side. They are more than content to sit in cash during 8%-12% intermediate-term corrections or outright bear markets. They know that the odds are much more in their favor during bulls than during bears.